Porter’s five forces model on Automobile Industry

1. Barriers to Entry – It’s true that the average person can’t come along and
start manufacturing automobiles. The emergence of foreign competitors
with the capital, required technologies and management skills began to
undermine the market share of many automobile companies. Globalization
the tendency of world investment and businesses to move from national
and domestic markets to a worldwide environment, is a huge factor
affecting the auto market. More than ever, itis becoming easier for foreign
automakers to enter the Domestic market .Automobiles depend heavily on
consumer trends and tastes. While car companies do sell a large
proportion of vehicles to businesses and car rental companies (fleet sales),
consumer sales is the largest source of revenue. For this reason, taking
consumer and business confidence into account should be a higher priority
than considering the regular factors like earnings growth and debt load .

2. Threat of Substitutes – Rather than looking at the threat of someone

buying a different car, there is also need to also look at the likelihood of
people taking the bus, train or air plane to their destination. The higher the
cost of operating a vehicle, the more likely people will seek alternative
transportation options. The price of gasoline has a large effect on
consumers’ decisions to buy vehicles. Trucks and sport utility vehicles have
higher profit margins, but they also guzzle gas compared to smaller sedans
and light trucks. When determining the availability of substitutes you should
also consider time, money, personal preference and convenience in the
auto travel industry. Then decide if one car maker poses a big threat as a
substitute.

3. Competitive Rivalry – Highly competitive industries generally earn low

returns because the cost of competition is high. The auto industry is
considered to be an oligopoly (A market condition in which sellers are so
few that the actions of any one of them will materially affect price) which
helps to minimize the effects of price-based competition. The automakers
understand that price-based competition does not necessarily lead to
increases in the size of the marketplace, historically they have tried to avoid
price-based competition, but more recently the competition has intensified
– rebates, preferred financing and long-term warranties have helped to lure
in customers, but they also put pressure on the profit margins for vehicle
sales. Every year, car companies update their cars. This is a part of normal
operations, but there can be a problem when a company decides to
significantly change the design of a car. These changes can cause massive
delays and glitches, which result in increased costs and slower revenue
growth. While a new design may pay off significantly in the long run, it’s
always a risky proposition

4. Bargaining Power of Suppliers – The automobile supply business is quite

fragmented (there are many firms). Many suppliers rely on one or two
automakers to buy a majority of their products. If an automaker decided to
switch suppliers, it could be devastating to the previous supplier’s business.
As a result, suppliers are extremely susceptible to the demands and
requirements of the automobile manufacturer and hold very little power. For
parts suppliers, the life span of an automobile is very important. The longer
a car stays operational, thegreater theneed for replacement parts. On the
other hand, new parts are lasting longer, which is great for consumers, but
is not suchgood news for parts makers. When, for example, most car
makers moved from using rolled steel to stainless steel, the change
extended the life of parts by several years.

5. Bargaining Power of Buyers -The bargaining power of automakers are

unchallenged. Consumers may become dissatisfied with many of the
products being offered by certain automakers and began looking for
alternatives, namely foreign cars. On the other hand, while consumers are
very price sensitive, they don’t have much buying power as they never
purchase huge volumes of cars.